2019 (5) TMI 287 - AT - Income Tax

Disallowance u/s. 36(1)(iii) - AO disallowed the proportionate interest treating it as related to capital work-in-progress - HELD THAT - CIT(A) confirmed the order of AO; without considering the fact that assessee has its own funds. Out of total Term Loan of ₹ 35.00 crore taken for Bellary Project, ₹ 27.88 was disbursed up to 31.07.2009 and the interest on same has already been capitalized. The balance loan of ₹ 7.12 crore was disbursed between 01.08.2009 to 31.03.2010 and the interest of ₹ 15.11 lakhs on this portion is charged to revenue. In worst case the amount which can be disallowed towards interest on capital WIP (work in progress) is to be ₹ 15.11 lakhs only. Balance loan amount of ₹ 7.12 crore, which was disbursed between 1.8.09 to 31.03.10 and interest on such loan of ₹ 15.11 lakh needs to be verified by AO, whether it falls in revenue zone or capital zone. Assessee treated ₹ 15.11 lakh as revenue expenditure. If this interest of ₹ 15.11 lakh is before put to use an asset, then it may be capitalized. Otherwise, it would be revenue expenditure. Therefore, AO should examine this factual aspect and to adjudicate the issue in accordance to law. Disallowance of interest u/s. 36(1)(iii) - AO held that assessee had utilized borrowed capital invested in SBI Mutual Fund of ₹ 5 crores - HELD THAT - As we already sent the issue back to the file of AO to examine whether the interest is to be capitalized or not in respect of balance loan of ₹ 7.12 crores ( ₹ 35 crores ₹ 27.88 crores), which was disbursed between 01.08.2009 to 31.03.2010. Therefore, disallowance of ₹ 2,93,580/- amounts to double addition/double taxation. Issue needs to be examined by AO whether investment for one month is not from borrowed fund. AO should verify whether investment of ₹ 5 crores is from own sources. Therefore, we direct the AO to examine this factual aspect and to adjudicate the issue in accordance to law. Hence, ground no. 4 raised by the assessee is allowed for statistical purpose. Disallowance u/s. 14A - Counsel pointed out that the assessee did not claim any exempt income. Assessee has offered the exempted income for taxation, therefore, there is no any question arises to disallow exempted income - HELD THAT - This factual aspect should be examined by AO to ascertain whether assesse has offered for taxation the entire exempt income or not. If the assesse has offered the entire exempt income, no disallowance is warranted; otherwise AO is directed to compute disallowance as per the provisions of section 14A r.w.rule 8D . This ground of assessee s appeal is allowed for statistical purpose.

Issues Involved:
1. Disallowance of depreciation
2. Disallowance under Sec. 36(1)(iii) of the Act
3. Disallowance of interest on capital work-in-progress
4. Disallowance of interest under Sec. 36(1)(iii) of the Act
5. Disallowance u/s 14A

Disallowance under Sec. 36(1)(iii) of the Act:
The appeal concerned an assessment year 2010-11 where the Assessee challenged the order passed by the Commissioner of Income-tax (Appeals)-1, Kolkata. The Assessee raised several grounds of appeal, including the disallowance of ?50,16,609 under Sec. 36(1)(iii) of the Act. The Assessing Officer disallowed this amount as interest allocable for capital work in progress. The Assessee argued that the disallowance was incorrect as the funds for the work-in-progress were from own funds, not borrowed funds. The Assessee detailed the disbursement of term loans and interest amounts to support this claim. The Tribunal noted that the Assessee's own funds were utilized for the work-in-progress, and only a portion could be disallowed. The Tribunal directed the Assessing Officer to verify the interest on the balance loan amount disbursed between specific dates to determine if it should be treated as revenue or capital expenditure. The Tribunal allowed the Assessee's appeal on this ground for statistical purposes.

Disallowance of interest under Sec. 36(1)(iii) of the Act:
The Assessee also challenged the disallowance of ?2,93,580 under Sec. 36(1)(iii) of the Act. This amount was related to borrowed capital invested in SBI Mutual Fund. The Tribunal found that this disallowance amounted to double taxation as the same issue was already referred back to the Assessing Officer for further examination. The Tribunal directed the Assessing Officer to verify if the investment in SBI Mutual Fund was from borrowed funds or own sources. Consequently, the Tribunal allowed the Assessee's appeal on this ground for statistical purposes.

Disallowance u/s 14A:
Another ground of appeal was the disallowance of ?2,23,676 under section 14A of the Act. The Assessee clarified that no exempt income was claimed, and all exempted income was offered for taxation. The Tribunal directed the Assessing Officer to verify if the entire exempt income was indeed offered for taxation. If so, no disallowance was warranted; otherwise, the Assessing Officer was instructed to compute the disallowance as per the relevant provisions. The Tribunal allowed the Assessee's appeal on this ground for statistical purposes.

In conclusion, the Appellate Tribunal ITAT Kolkata addressed various issues raised by the Assessee regarding disallowances under different sections of the Income-Tax Act. The Tribunal provided detailed analyses for each issue, directing the Assessing Officer to re-examine certain aspects to ensure correct treatment of expenses and income. The Tribunal allowed the Assessee's appeal on certain grounds for statistical purposes, emphasizing the importance of accurate assessment and adherence to legal provisions.

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